Egypt: on the brink of another crisis

Busy with the Battle of Aleppo and ISIL’s retreat in Iraq, Middle East-focused media may have lost interest in Egypt, but the picture emerging from Cairo is anything but rosy. In fact, it is gloomy. The country’s fiscal strength remains a token force. Tourism plummets. And remittances from Egyptian expats in the Gulf are fast drying up, adding to the country’s financial woes.

However, there was a glimmer of hope for President Abdel Fattah El-Sisi as the International Monetary Fund (IMF) agreed in principle to grant Egypt a $12 billion three-year loan or Extended Fund Facility (EFF) to help the government plug a budget gap and rebalance the currency markets. The deal, which is subject to approval by the IMF’s Executive Board, comes almost four years after a first trial was pulled by Egypt due to the ongoing turmoil in the wake of the Arab Spring revolution. Then, in the summer of 2013, then-army-chief El-Sisi deposed President Mohammed Morsi and an IMF deal was put on hold again.

The new agreement was announced just days after the IMF successfully concluded the 11th review of the $6.01 billion EFF for Pakistan, releasing the last tranche of $501 million as Pakistan’s Minister of Finance Ishaq Dar and IMF mission chief Dr Harald Finger announced on August 4 in Dubai.

As in the case of Pakistan, the $12 billion fund will not be released to Egypt in one lump sum, but in installments over a period of three years. Regular meetings between the IMF and the government in Cairo will take place in order to monitor the proper implementation of reforms.

IMF mission chief Chris Jarvis said: “The government recognizes the need for quick implementation of economic reforms for Egypt to restore macroeconomic stability and to support strong, sustainable and job-rich growth.” The World Bank expects the economy to slow down to 3.3 percent in 2016, compared with 4.2 percent last year.

In addition to the IMF loan scheme, “Egypt is expected to raise $9 billion from the World Bank, African Development Bank and from issuing bonds in the international markets,” according to Garbis Iradian, chief economist for MENA at the Institute of International Finance (IIF) in Washington DC.

Iradian added: “Egypt urgently needs to rectify serious macroeconomic imbalance as a prelude to tackling deeply embedded structural distortions in the economy.”

IMF’s demands

According to Dr Masood Ahmed, IMF regional director for the Middle East and Central Asia, subsidies are a major roadblock on the way to prosperity. In oil-importing nations like Egypt, he said, subsidies swallow a significant part of government budgets. “The results are rising deficits and debt levels,” added Dr Ahmed, who will retire in October.

As such, the IMF demands that the El-Sisi administration should roll back the subsidies now. Bread, tap water and public transport are still a bargain, because they are subsidized by the state.

This loan program “aims to improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and raise growth and create jobs, especially for women and young people,” explained mission chief Jarvis.

Controlling fiscal deficit

Egypt’s debt-to-GDP ratio stands at 98 percent, which is almost as high as the debt-to-GDP ratio in Spain, but much lower than Arab oil importer Lebanon (above 140 percent). “Over the program period, general government debt is expected to decline from about 98 percent in 2015/16 to roughly 88 percent of GDP in 2018/19,” said Jarvis.

The fiscal deficit reached 12 percent to GDP in June. Since the pre-Tahrir year (2010), the deficit had never been lower than 11 percent.

Unemployment stands officially at 13 percent, whereas every fourth Egyptian younger than 30 is without a job. Half of the country’s youngsters are poor, living on less than $3.10 per day.

While the oil rout (as of August 14, US crude was traded at close to $45 per barrel compared with $110 per barrel in mid-2014) helped oil-importing countries like Egypt and its citizens to cut spending, it also deferred investments from the oil-exporting Gulf states.

As Sheikh Ahmed Bin Saeed Al-Maktoum, the chairman of Dubai’s government-controlled Emirates airline, said earlier in the year: “The low price of oil is a two-edged sword.” On the one hand, remarked Sheikh Ahmed, it helps to reduce operational costs for airliners, but, on the other, a slump in the valuation of energy weighs on business sentiment in the oil-exporting nations.

According to the IMF, “The cumulative fiscal deficits of the GCC and Algeria are projected at almost $900 billion during 2016-21.” In effect, this has hit the support flowing from the Arabian Gulf to the Nile River.

Investments from the GCC into Egypt have been postponed, projects have been downgraded and Egyptian expats working in the Gulf countries are reducing remittances because their employers have  had to cut salaries and reduce bonuses.

Despite lower energy and transport costs, annual inflation reached a seven-year high in June, climbing to 14 percent, according to Almonitor.

In addition to that, tourism declined by 50 percent in the first half of 2016. Only three million visitors came to see the sites of the Sphinx, the Cheops pyramids, the temples of Abu Simbel and the Red Sea coasts.

A volatile security situation prevented the hospitality industry from growing. In January, three foreign tourists were stabbed by alleged Islamic State terrorists at a Red Sea resort in Hurghada,
once one of the most popular diving resorts in the world; then, on August 8, gunmen shot dead a civilian in North Sinai, Alahram reported. These incidents are further deterring tourist arrivals.

President El-Sisi has stressed that the army will continue its battle against ISIL spin-offs until they are defeated, but the present danger of a violent spillover from unstable Libya has put Egypt in a two-front asymmetric war.

Way forward

“The economy has been suffering from a severe foreign currency shortage since mid-2015,” pointed out Iradian. “This is mainly due to the sharp fall in foreign exchange earnings from exports of goods, because of an overvalued currency and supply bottlenecks; the fallout on tourism, affected by security incidents, including the crash of the Russian plane following a terrorist bomb; and a decline in remittances from Egyptian expats due to the slowdown in the GCC. As a result, official reserves remain inadequate, at $15.5 billion  –equivalent to 2.7 months of imports of goods, services and income payments, and less than half the level before the Arab Spring.”

However, all is not lost, according to IMF’s Jarvis. The government is looking at solutions. He explained: “Egypt is a strong country with great potential, but it has some problems that need to be fixed urgently.”

He went on to add: “Structural reforms will aim at improving the business environment, deepening labor markets, simplifying regulations and promoting competition. Also, public financial management and fiscal transparency will be strengthened to improve governance and delivery of public services, enhance accountability in policymaking and combat corruption.”

On a positive note, the IMF mission chief added: “We have talked to our colleagues in the World Bank and the African Development Bank and they are willing to help.”